Which option is effective in managing inflation risk for annuities?

Choosing an indexed annuity is effective in managing inflation risk because these products are specifically designed to adjust payments based on changes in a specified inflation index, typically linked to the Consumer Price Index (CPI) or other inflationary measures. This means that as inflation rises and the purchasing power of money decreases, the payments from an indexed annuity can also increase, thus maintaining the annuitant's purchasing power over time.

In contrast, purchasing a traditional fixed annuity offers stable payments that do not adjust for inflation, which may result in diminished purchasing power if inflation rises. Adding a surrender option does not address inflation risk, as it primarily provides flexibility for the annuity owner regarding access to their funds but does not influence payment amounts. Lastly, minimizing the payment frequency simply refers to how often payments are received and has no bearing on how those payments are adjusted in response to inflation.

Overall, indexed annuities provide a proactive solution against inflation risk by linking payment increases to economic indicators that reflect the cost of living changes.